When making a decision, price takers ______.

When making a decision, price takers ______.

• A. Ignore sunk costs when making decisions
• B. Only consider fixed costs that have not yet been incurred
• C. Base decisions on total costs
• D. Focus on long-run profits

Answer: (A)

Sunk costs should be ignored in decision making. For price takers, the choice to produce or continue production depends only on future, incremental costs and revenues, not on money already spent. Since the market price is given, decisions hinge on whether the incremental cost of producing another unit is covered by that price. Past outlays that cannot be recovered do not affect this rational choice, so ignoring sunk costs is the best approach. Other ideas misstate what matters in decision making: focusing only on fixed costs not yet incurred isn’t correct because decisions depend on the incremental or variable costs that differ between options; basing on total costs includes sunk and unrecoverable amounts; and focusing on long-run profits doesn’t address the immediate, incremental decision rule priced by the market.

Sunk costs should be ignored in decision making. For price takers, the choice to produce or continue production depends only on future, incremental costs and revenues, not on money already spent. Since the market price is given, decisions hinge on whether the incremental cost of producing another unit is covered by that price. Past outlays that cannot be recovered do not affect this rational choice, so ignoring sunk costs is the best approach.

Other ideas misstate what matters in decision making: focusing only on fixed costs not yet incurred isn’t correct because decisions depend on the incremental or variable costs that differ between options; basing on total costs includes sunk and unrecoverable amounts; and focusing on long-run profits doesn’t address the immediate, incremental decision rule priced by the market.